How does Copy Trading work?

Copy trading is a modern phenomenon that has changed the nature of the trading industry. Find out what is, how it developed and why it’s so important in today’s crypto markets.

Making mistakes is a part of life, and with those mistakes comes a desire to never repeat them. The best course of action to grow from these blunders is the enduring life lesson of learning from them. The same can be said about success stories; learning from them so that you too can experience similar achievements.

In the financial world, there is a concept that centers around this philosophy. It is a popular method in the trading market that often leads to benefits for those who apply it. This method is called ‘copy trading.’ This article will explain what it is, the mechanics of it, and what sets it apart from other trading methods.

What is it?

‘Copy trading’ is a method allowing financial market traders to automatically copy positions that a selected investor opens and manages. This is typically in the context of a social trading network.

It connects part of the copying trader’s funds to the account of the investor that is copied. The following trading actions by the copied investor are also executed in the copying trader’s account. These actions include opening a position, appointing Stop Loss and Take Profit orders, and also closing a position. This is in accordance with the proportion between the copied investor’s account and the copying trader’s assigned copy trading funds.

The copying trader will often maintain the ability to sever copied trades and independently handle them. They are also able to close the copy relationship altogether. Copied investors often receive compensation by flat monthly subscription fees. These fees are on the part of a trader that is aiming to copy their trades.

Different copy trading platforms employ a diverse collection of copy trading logic. These will frequently vary when it comes to specific factors. These include the minimum copy trading amounts and the minimum amount for a copied trade. Moreover, the way in which the money in/out operations on behalf of the copied trader is reflected in the dimensions between the copied-copying accounts.

Several platforms also facilitate traders placing Stop Loss orders on the entire copy trading relationship. Thus, it allows traders to control the risk of their copy trading activity, drawing from the individual copied investors

Mirror: what’s the difference?

One trading method that tends to get the ‘compare and contrast’ treatment with copy trading is ‘mirror trading’. This is a forex (a portmanteau of foreign currency exchange) strategy that permits investors to copy the trades of successful forex investors. To put simply, it’s a method that allows traders to copy specific strategies

Mirror trading was originally only available to institutional clients, but it then became available to retail investors. Its automated nature can assist the prevention of investors from making trading decisions drawing from emotions. Since its mid to late 2000s inception, mirror trading serves as the inspiration of other similar strategies. These include our main topic, copy trading, and ‘social trading’, which we will discuss in the next section.

Mirror traders utilize a forex brokerage’s trading platform as a means to examine the histories and details of various strategies. The trader then selects an algorithmic trading strategy from the available options that derive from several aspects. Such aspects include their investment goals, risk tolerance, investment capital, and the currencies they desire.

For example, let’s imagine that a trader possesses a minimal risk tolerance. In this particular case, they might choose to mirror a strategy that has a low maximum drawdown. When strategy developers carry out their trades, these trades undergo a duplication in mirror traders’ accounts. This uses automated software that operates 24/5 with the primary intention of replicating near identical results.

Social: what’s the difference?

‘Social trading’ is an investment style that allows investors to observe the trading behavior of their peers and expert traders. Furthermore, it allows them to follow their investment strategies employing both copy trading or mirror trading. This type of trading requires very little knowledge of financial markets. In the eyes of the World Economic Forum, it is a low-cost alternative to traditional wealth managers.

Social trading is another way to analyze financial data by looking at what other traders are doing. With this information, it’s possible to compare and replicate their techniques and strategies. Prior to social trading’s arrival, investors and traders were counting on fundamental or technical analysis to formulate their investment decisions. Utilizing social trading investors and traders could incorporate into their investment decision-process social indicators from exchanging other traders’ data-feeds. One can view social trading platforms and/or networks as sort of a subcategory of online social networks.

This type of trading allows traders to trade online with additional assistance. On top of that, some claim that it shortens the learning curve from novice to expert. Traders can interact with each other and observe others taking trades, then duplicate their trades. Moreover, they learn what initially made the top performer take a trade. By copying the actions of other trades, one can easily learn which strategies work and which do not.

Social trading is often a tool for speculation. In the moral context, speculative procedures garner negative reception and it’s advised that it should be avoided. Conversely, they should preserve a long term horizon dodging any and all types of short term speculation.

Copy trading’s rise to popularity

At this point, we have to clarify something important. There are a total of two main types of traders:

  1. The group that attends seminars, attempt to compile strategies, follow all market trends and enjoy ‘expert-trading-fees’.
  2. The group that wants to make money with as little input and effort as possible.

In the case of the second group, there was the creation of copy trading and mirror trading. The gradual development of copy trading during the past 5 years has been noteworthy. This is primarily because a majority of traders have great trust in this system. Moreover, they believe that they are not trading alone, which makes the experience comforting.

Copy trading is something that exists not only for those who lack experience. In fact, there are a lot of veteran traders who use copy trading as a means of market research. The reason for this being that it saves time and can be part of a new – and profitable – strategy that’s due for implementation.

The mechanics behind the method

Unlike social trading, copy trading is not as reliant on the information other traders provide as it is reliant on their actions. Basically, as touched upon earlier, copy trading allows you to copy other traders’ actions. For a process to officially be labeled copy trading, you have to copy a trader with the platform’s automatic system.

The method of copy trading connects part of your portfolio with the portfolio of another trader. After copying a trader, all of their trades that are open are copied to your account. Additionally, all of their future actions are automatically copied to your account. You then choose a sum to invest in a specific trader. Most of the time, the sum cannot exceed 20% of your portfolio.

The sums trades use are a percentage of the trader’s portfolio that draws from how much you are investing. Let’s imagine that your account’s balance is USD 1000. You have no open trades, but you want to copy a trader. Their stats look promising, but because this is your first experience, you may want to avoid investing too much. This is why you invest USD 100, or 10% of your funds. The trader possesses one open trade, which is copied to your account.

The sum of USD 100 you’re investing is a percentage of the trader’s portfolio. If their portfolio is USD 1000, then your investment is 10% of his portfolio. If they execute a trade for USD 100, then you will make the same trade. However, the invested money from your account is going to be 10% of their invested money. To be specific, USD 10 if their investment is USD 100. The mechanics are automatic, so you won’t have to do much since the system does everything immediately.

The addition and removal of funds

If you find yourself liking how the trader is handling your investment, you can effortlessly increase the funds. This way, you invest more whenever a trade is copied to your account. This will increase your profits following a successful trade. With that in mind, this also increases the risks. This is because if it ends up to be a losing trade, your losses will also be much bigger.

It’s a wise idea to make sure your portfolio is diverse and not invest too much in a single trader. You are still able to increase or reduce the investment, drawing from the performances of the trader. If the results are satisfactory for you, you can try to boost your profits by investing more. It is very important for you to remember that investing much more of a risky move.

Copy trading individually

As soon as you start to copy a trader, you can have different scales of control. This depends entirely on the platform of your choice. Various sites utilize a fixed system. What this means is that once you begin following a trader, tall you can really do is stop copying them.

Be that as it may, there are more flexible platforms that allow you to manually control your funds. For instance, let’s say that there is a trade you don’t like. Alternatively, there is a trade that you think you will lose from if it remains open. If either one of these is the case, then you can manually close it.

The benefits of copy trading

On the whole, trading can be an intimidating task to partake in. It’s not overly easy to commence, and as soon as you throw in charts and patterns, it becomes extra confusing.

This is where copy trading comes into play. This method assists in removing any trace of that lingering fear. Its process allows you to start to trade without the requirement of extensive trading knowledge. This way, you are able to see what successful traders with experience do. Moreover, you can also figure out why. Assuming these traders are very communicative, they can even directly show you, educate you, and give you a few tips. Undoubtedly, this is a relationship that is mutually beneficial.

Connecting to this is the idea that you can effectively learn from your mistakes. There is a strong possibility that you have never engaged with trading at any point in your life. Still, there is no denying that this won’t prevent you from seeing what works and what doesn’t. Furthermore, it will not keep you from drawing inspiration from other people’s successes and failures.

Conclusion

At the end of the day, copy trading is the ideal method for any newbie trader. It will allow you to learn about the success of others and evolve from their mistakes. While there are risks – what method doesn’t have those? – it is a nice way to make money on the market.

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